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Reserve Bank of India Repo Rate Forecast Report August 2020

The RBI is expected to cut the repo rate at the August meeting, with 82% of economists tipping a cut and just 18% expecting the rate to hold.

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Key findings

  • 82% of panellists expect a rate cut
  • Most of those predicting a decrease expect a 25 basis point fall
  • 56% expect the economy to recover to pre-COVID activity at some point in 2021

Expert forecasts ahead of the August decision

Name and organisationForecastComment
James Middleton, independent economistDecrease
Birabrata Panda, senior economist and statistician at Acuite RatingsDecreaseRepo rate is already at the lowest. Moreover, monetary policy is ineffective to stimulate growth.
Indranil Pan, chief economist at IDFC FIRST BankDecreaseEffectiveness of monetary policy is reducing with every rate cut, as there is evidence of limited transmission. However, the RBI might not be able to sit quite at this point and a rate cut should be seen as a sentiment booster to the economy.
Darren Aw, Asia economist at Capital EconomicsDecrease
Rucha Ranadive, economist at CARE Ratings Ltd.HoldThe CPI-based inflation, RBI’s target, has surpassed a tolerance level of 6% in the month of June 2020. In addition, there is still room for banks to pass on the earlier policy rate cuts as the transmission of rate cuts is improving gradually. At present, the banking system is also in a surplus liquidity position. Thus, this calls for a pause in the rate cut cycle of the RBI.
Prithviraj Srinivas, executive director and economist at Axiscapital, wholly-owned subsidiary of Axis BankDecreasePrevious RBI minutes indicated that MPC will look to keep their powder dry and time larger rate cuts for when the economy is out of lockdowns. Besides, excess liquidity in the banking system has already pushed the effective policy rate well below the stated rate.
Radhika, banker at DBSDecrease
Upasna Bhardwaj, economist and senior vice president at Kotak Mahindra BankDecreaseWhile near-term supply-side issues have kept the inflation temporarily high, the demand side destruction remains a more permanent issue to tackle, so the MPC may still want to deliver another rate cut in August. Notably, 2HFY21 inflation trajectory still remains benign, with few readings likely around or below 3%. Though, with most of the monetary easing frontloaded there is only limited scope for much rate cuts beyond that.
Akash Doifode, economist at Zdaly/Worlddata.aiDecreaseAs the CPI inflation is well within the band of the 4 (+/- 2%) there is still a chance for the RBI to cut the rates for further transmission in the lending rates. Considering the continuous rise of COVID-19 cases in the country and contraction in IIP by 35% in May, the central bank will cut its rate by another 25 basis points.
Anuj Puri, chairman at Anarock Property Consultants Private LimitedHoldWe still think that our forecast for the next RBI rate decision is “hold” because there has been a slight rise in inflation rates in the past few weeks. In this scenario, RBI would consider it better to put the repo rate on “hold”.
Ankita Pathak, lead analyst at Edelweiss FinancialDecreaseThe RBI has stated to be accommodative and ensure financial stability. In times when growth is expected to contract, the output gap is far wide open. We also expect inflation to fall within the RBI’s mid-point target of 4% in H2. With normal monsoon, lower crude prices and in the absence of demand stimulating fiscal expenditure, inflation concerns are largely abated both on the wholesale and the retail level. There is little rationale in having positive real rates at this point. The rate cut transmission has only been on the shorter end of the curve, while the longer end remains elevated. Thus, RBI will be expected to front-load the rate cuts while also doing Open Market Operations and Operation Twists to flatten the yield curve.

Forecasts for the rate

The Reserve Bank of India (RBI) is set to decrease the repo rate in August, according to the majority of 11 economists on Finder’s RBI repo rate forecast panel. 82% of economists expect a cut, most tipping a decrease of 25 basis points.

Chief economist at IDFC FIRST Bank, Indranil Pan, believes the Bank will decrease the rate, even though “the effectiveness of monetary policy is reducing with every rate cut.”

“…the RBI might not be able to sit quiet at this point and a rate cut should be seen as a sentiment booster to the economy,” he said.

Lead analyst at Edelweiss Financial, Ankita Pathak, and economist at Zdaly, Akash Doifode, also say a rate cut is on the cards, both noting the expectation for the RBI to frontload monetary easing.

However, not everyone thinks a decrease is the right move. Two panellists, senior economist and statistician at Acuite Ratings, Birabrata Panda, and executive director and economist at Axiscapital, Prithviraj Srinivas, expect the Bank to cut the rate but are actually in favour of a rate hold.

Panda argues that the repo rate is already low and that monetary policy is ineffective to stimulate growth. Meanwhile, Srinivas says that the MPC might want to hold the rate in favour of future rate cuts.

“Previous RBI minutes indicated that MPC will look to keep their powder dry and time larger rate cuts for when the economy is out of lockdowns. Besides, excess liquidity in the banking system has already pushed the effective policy rate well below the stated rate,” Srinivas commented.

The remaining two panellists, economist at CARE Ratings, Rucha Ranadive, and chairman at Anarock Property, Anuj Puri, expect the Bank to hold the rate. Ranadive argues that current conditions warrant a pause in the rate cut cycle.

“The CPI-based inflation, RBI’s target, has surpassed a tolerance level of 6% in the month of June 2020. In addition, there is still room for banks to pass on the earlier policy rate cuts as the transmission of rate cuts is improving gradually. At present, the banking system is also in a surplus liquidity position,” she said.

Has the rate reached its effective lower bound?

The panel is divided on how effective they think future rate cuts might be. Of the eight panellists who answered the question, 37.5% say the rate has reached its effective lower bound, while 12.5% are unsure and 50% say there is still room to move.

The lowest rate estimate came from Doifode, who thinks the Bank can effectively decrease the rate to 2%. This is followed by Ranadive who gave a range of 2.75-3%, Srinivas at 3% and Pan at 3.5%.

Is the RBI doing enough?

When asked whether the RBI was doing enough to support the economy throughout the COVID-19 pandemic, the panel’s response was overwhelmingly positive. Of the nine panellists who responded to the question, 89% said yes, and just one panellist said she was unsure.

Most economists were quick to note that the Bank had done what it could to ensure liquidity and ease strains on the financial sector.

Doifode put it his way:

“Yes, the RBI is doing its best to support the fragile economy. They have announced numerous liquidity measures and also reduced the repo rate significantly. So overall, the RBI has done enough of its part,” he said.

Only senior vice president and economist at Kotak Mahindra, Upasna Bhardwaj, was unsure.

“While on rate and liquidity, the Central Bank has been quite proactive, certain regulatory changes can still be made to cushion the risks arising from heavy bond supply and rising risk of NPAs with deteriorating balance sheets,” she commented.

When can we expect pre-COVID economic activity to return?

With 2019 well and truly in the rearview mirror and so many changes in 2020, everyone’s wondering when we can expect things to return to normal. The panel has mixed views on when we can expect pre-COVID economic activity, however, the majority are saying it’ll be some time in 2021. Around a third say it’ll be in the first half of the year, while 22% say it’ll be in the latter half.

The remaining panellists expect a longer timeline, with 22% saying it’ll be 2022, 11% saying 2023 and just one panellist, Asia economist at Capital Economics, Darren Aw, expecting the economy to recover beyond 2025.

He says that the coronavirus crisis and the government’s unwillingness to respond adequately to it will leave a legacy of impaired household and corporate balance sheets.

“With demand weak, we doubt that output in India will return to its pre-virus path for a decade,” Aw added.

The shape of economic recovery

So what will this recovery look like? The panel didn’t write off a V-shaped recovery, with a quarter of panellists (25%) expecting recovery to take this shape. Ranadive says that recovery will look like a V, noting that economic growth will plummet in FY21, as businesses have been hurt with coronavirus-induced lockdowns.

“The restrictions are expected to unwind only in the second half of the year, but demand concerns will persist at least till Q3 FY21. The recovery thereafter will pick up gradually and will surge in FY22, partially aided also by the statistical base effect,” she commented.

Panda also expects a V-shaped recovery. He says, “The government expenditure and [a] healthy firm sector is likely to revive the consumer demand.”

However, economic recovery is most likely to look like an extended U, with 50% of panellists tipping this shape.

Bhardwaj says that several sectors will take a prolonged time to recover as behavioural changes begin to shape up consumer activity. “Uncertainty on income and job losses will further weigh on sentiments,” she commented.

Just 13% are expecting a standard U-shaped recovery, while one panellist, Pan, thinks it’ll be something else entirely: a “Nike-swoosh” recovery.

“A very weak April-June 2020 and then gradual recovery, [the] economy will still be in [the] negative zone till end-December 2020,” he commented.

Pan also says that while the monetary policy has done enough, he thinks the fiscal policy is lagging.

“Effectively, there has been an erosion in the disposable incomes of people (salary cuts, job losses, etc) and this should impact consumption negatively. We feel that all jobs lost during the COVID-19 crisis might not come back,” he says.

How much will the economy contract this year?

On average, the panel expects the economy to contract by around 5.4% this year. Panda is expecting the economy to contract the most at 6.9%. Pan and Ranadive are also forecasting a contraction upwards of 6%, with each forecasting a 6.4% drop. Aw, Bhardwaj and Doifode all gave forecasts closer to the average, ranging from 5-5.8%.

The only two economists to give a below-average forecast were independent economist James Middleton and Srinivas. Middleton gave the most optimistic forecast at 3%, however, he doesn’t expect the economy to recover to pre-COVID activity until 2023.

Puri didn’t put a number on how much the economy will contract by, but he thinks that based on the current scenario, GDP growth will be in the negative territory for the 2020-2021 financial year, “unless we see a V-curve in the last two quarters,” he added.

Six-month economic outlook

Over the next six months, our panel is most negative on household debt (78%), wage growth (56%) and employment (56%). However, a third of panellists (33%) are positive on housing affordability.

What would you like to see implemented in the next stimulus package?

Name and organisationHow big do you think the next stimulus package will be as a percentage of GDP?What would you like to see implemented in the next package?
James Middleton, independent economist2%Recapitalisation of the financial sector.
Birabrata Panda, senior economist and statistician at Acuite Ratings1%The government should stimulate household consumption rather than guarantee food to the households.
Indranil Pan, chief economist at IDFC FIRST BankJune is already gone without any stimulus. The government ultimately will have to come out with some package but we expect this only post-September 2020.GST cuts, some reduction in income tax levels at the lowest 2-3 slabs.
Prithviraj Srinivas, executive director and economist at Axiscapital, wholly-owned subsidiary of Axis Bank5%Extension of credit guarantees, higher allocation to public jobs program (NREGA) and fast-tracking public sector schemes that are labour intensive (like drinking water connectivity).
Radhika, banker at DBS1%
Upasna Bhardwaj, economist and senior vice president at Kotak Mahindra Bank1%Demand related measures along with an extra boost to infrastructure spending.

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